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Edited Transcript of AGO earnings conference call or presentation 8-Aug-19 11:30am GMT

Q2 2019 Assured Guaranty Ltd Earnings Call

Hamilton Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Assured Guaranty Ltd earnings conference call or presentation Thursday, August 8, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Todd Feldstein

BlueMountain Capital Management LLC - Co-Founder, CEO, CIO & Partner

* Dominic John Frederico

Assured Guaranty Ltd. - Deputy Chairman, President & CEO

* Robert Adam Bailenson

Assured Guaranty Ltd. - CFO & CAO

* Robert S. Tucker

Assured Guaranty Ltd. - Senior MD of IR & Corporate Communications

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Conference Call Participants

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* Bose Thomas George

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Christian Littlejohn;Marble Ridge Capital

* Geoffrey Murray Dunn

Dowling & Partners Securities, LLC - Partner

* Giuliano Bologna

BTIG, LLC, Research Division - Director & Financials Analyst

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Presentation

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Operator [1]

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Hello and welcome to the Assured Guaranty Limited Third Quarter 2019 Earnings Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Robert Tucker, Managing Director Investor Relations and Corporate Communications. Please go ahead, sir.

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Robert S. Tucker, Assured Guaranty Ltd. - Senior MD of IR & Corporate Communications [2]

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Thank you, operator. And I'd like to thank everyone for joining us on Assured Guaranty's call today. It's our second quarter 2019 financial results conference call. Today's presentation is made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The presentation contains forward-looking statements about our new business and credit outlooks, market conditions, credit spreads, financial ratings, loss reserves, financial results or other items that may affect our future results. These statements are subject to change to new information or future events. Therefore, you should not place undue reliance on them as we do not undertake any obligation to publicly update or revise them, except as required by law. If you're listening to a replay of this call, or if you're reading the transcript of the call, please note that our statements made today may have been updated since this call. Please refer to the Investor Information section of our website for our most recent presentations, and SEC filings, most current financial filings and for the risk factors.

This presentation also includes references to non-GAAP financial measures. We present the GAAP financial measures, most directly comparable to the non-GAAP financial measures referenced in this presentation, along with a reconciliation between such GAAP and non-GAAP financial measures and our current financial supplement and equity investor presentation, which are on our website at assuredguaranty.com.

Turning to the presentation. Our speakers today are Dominic Frederico, President and Chief Executive Officer of Assured Guaranty Limited; Rob Bailenson, our Chief Financial Officer; and Andrew Feldstein, CEO and CIO of BlueMountain.

After their remarks, we'll open the call to your questions. As the webcast is not enabled for Q&A, please dial into the call if you'd like to ask questions. I will now turn the call over to Dominic.

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Dominic John Frederico, Assured Guaranty Ltd. - Deputy Chairman, President & CEO [3]

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Thank you, Robert, and welcome to everyone joining today's call. The second quarter was very successful for Assured Guaranty, with $141 million in non-GAAP operating income, new highs in key shareholder value measures, substantial new business production and a milestone in our efforts to diversify our revenue base and intelligently deployed our excess insurance company capital to the execution of one of our strategic objectives. I'll let Rob give you the details about our earnings results and our continuing share repurchase program in a few minutes.

I'll start with the news we released yesterday. We have taken a significant step forward in our strategic execution by adding an asset management component to our overall business operations. This will diversify our revenue sources with fee-based income and provide an additional engine for growth in profits and free cash flow. We accomplished this by investing some of our trapped excess capital in a seasonal trend of asset management company whose core competencies and credit culture are compatible with ours and with a likelihood for attractive returns is high. We have agreed to acquire BlueMountain, a highly regarded asset management firm, with a scale that can provide meaningful returns to Assured Guaranty. BlueMountain has extensive experience evaluating credit and managing investments and it is recognized as a top tier CLO manager. We can leverage its sophisticated infrastructure to facilitate future acquisitions in the asset management sector. And we see credit and capital market synergies with our existing financial guaranty franchise in a number of areas such as CLOs, asset-backed finance, infrastructure and health care.

BlueMountain's top management will join Assured Guaranty not only to continue running BlueMountain, but also to lead Assured Guaranty's alternative investment strategy. BlueMountain's CEO, Andrew Feldstein, who is also a cofounder of BlueMountain and its current Chief Investment Officer will become Assured Guaranty's Chief Investment Officer and head of our asset management business, bringing his leadership, experience, investment acumen and enthusiasm for building the asset management component of our business strategy as well as oversee the management of the overall Assured Guaranty investment portfolio. Andrew will join us later in the call and be available in the Q&A.

Under the agreement, we'll be purchasing for approximately $160 million, all the outstanding equity interest in BlueMountain Capital Management, LLC and its associated entities, subject to certain customary closing conditions and regulatory approval. We will also contribute $60 million in working capital to BlueMountain at closing and we expect to provide an additional $30 million of working capital within a year after that. Additionally, we expect to invest $500 million of BlueMountain funds, CLOs in separately managed accounts over a 3-year period. We anticipate a fourth quarter closing. We intend to fund the acquisition with loans from AGM, MAC and AGC subject to regulatory approval. This approach allows us to put capital in our insurance companies to work supporting the asset management business without using our dividend capacity or special dividend. And we expect that having BlueMountain manage $500 million of our investment in portfolio, will result in higher investment income, which should lead to higher dividend capacity for our insurance subsidiaries in the future.

I should note that S&P recently updated the bond insurance investment portfolio capital charges to the same charges that applies to property, casualty, life and other insurance companies. This opens up a broader range of investment options for us with more favorable capital treatment from S&P. Remember, previously under S&P rules, any investment rated below A incurred a 100% capital charge.

As structured, we expect the transaction to have no impact on our financial strength and ratings, and as I mentioned, we plan to continue our current share repurchase program, and yesterday, our Board approved an incremental $300 million in share repurchases.

Turning to the second quarter production, both the municipal bond industry as a whole and Assured Guaranty in particular, performed well in comparison with last year's second quarter, even though overall conditions in U.S. public finance were extremely challenging. The total par volume of second quarter municipal bond issuance declined approximately 5% and the increased demand for taxes and bonds closed by tax reform has actually driven rates down in our principal market, as investors reportedly poured a record $47 billion into municipal bond funds during the first half of this year. The second quarter also saw a 30-year AAA taxes and yields declined from 2.6% to 2.31% and the spread between the 30-years single-A and AAA GOs shrink as well as 37 basis points at quarter end. That spread was never above 43 basis points during the quarter compared with an average of 53 basis points during 2017 and 2018.

The second quarter saw the tightest credit spread environment since the financial crisis, which eliminated some transactions that might have benefited from insurance if interest rates were higher and spreads had been wider.

In spite of this challenging environment, municipal bond insurance was still used on 6.9% of total par and 17.9% of new issues sold -- of the new issues sold in the second quarter compared with last year's second quarter. The use of insurance increased with the total par volume of new issued solvent insurance rising 13% and the number of insured transactions up 38%. Those increases were driven mainly by Assured Guaranty's performance with our par volume up 27% to $3.7 billion, representing a 60% share of the insured par volume and our deal count rising 59% to 260 new issues.

Our performance looks even better when you consider the 186% increase in par we assured in the secondary market, where we capitalized on attractively priced opportunities. When you include our secondary market business, our total U.S. public finance par volume exceeded $4 billion in the quarter. And yesterday, by the way, we guaranteed a $700 million portion of an issue by Common Spirit Health, our largest public finance transaction so far this year.

In the international infrastructure market, we continue to see growing interest in our product. In the United Kingdom, we executed a GBP 50 million Scottish housing association transaction during the second quarter. And last week, we announced our guarantee of a GBP 124 million student accommodation financing for the University of Leicester. We expect the U.K. market to continue to provide opportunities including both new money issues and refinancings. And our international strategy also continues to emphasize diversification in a variety of national markets.

During the second quarter, we wrapped the first guaranteed solar energy transaction in Spain, a EUR 207 million refinancing of 9 solar energy plants. This is the largest renewable energy transaction that we have guaranteed anywhere, and we are optimistic about additional transactions in the solar sector.

The transaction was privately placed with both European and South Korean investors. In the Australia and New Zealand market, we have signed an exclusive cooperation agreement with DTW Capital Solutions, the Sydney-based independent arrangement adviser, which we developed a strong working relationship with collaborating on last year's Port of Brisbane transaction.

We believe DTW's experience and relationships in its home market will help us expand the use of our guarantees in a market where there is significant need for long-term financial solutions.

In Global Structured Finance, the highlight of the quarter was a secondary market guarantee of a $208 million middle-market collateralized bond obligation, which was purchased by a European asset manager. We've been fielding numerous inquiries regarding CLOs and are focusing on educating potential investors about the benefits of holding investments we guarantee. We believe we have tapped only a fraction of the potential business where we help financial situations and insurance companies manage their capital efficiently. We also anticipate more opportunities in the life insurance and aviation sectors. During the third quarter, we closed a significant insurance reserve transaction. Across all 3 financial guarantee product lines for the first half, we generated $96 million of PVP, and in the third quarter so far, we have added another $65 million of PVP with significant contributions from each of the product lines, a strong start to our third quarter.

Central to all of our financial guarantee businesses is our financial strength. And the rating agencies recently offered additional confirmation of that strength. In June, S&P affirmed the ratings of all of our insurance units at AA with a stable outlook. S&P does not publish a figure for excess capital under their AAA depression stress model, but we estimate it was approximately $3.2 billion as of December 31, 2018 under the criteria used in their June report. This is $400 million higher than our December 31, 2017 number of $2.8 billion, despite our capital management program and the continued payment of Puerto Rico debt service claims.

S&P has subsequently come out with new bond insurer rating criteria which includes the more favorable capital charge treatment of our investment portfolio that I mentioned earlier. The new S&P criteria will also improve the capital charge treatment of our hospital transactions. We are confident the updated criteria will not have -- will not affect our ratings out -- our ratings or our outlook at S&P. And recently, Kroll Bond Rating Agency affirmed its AA+ rating of MAC, our U.S.-only municipal bond insurance platform that primarily provides insurance for small and medium-sized municipal bond issues. The outlook is stable.

Lastly, AMBF last month affirmed its A+ rating of AGRO, the Bermuda-based subsidiary responsible for our aviation residual value insurance business and some of our structured solutions for the insurance industry.

In the quarter, we saw some progress in Puerto Rico. A highlight of the second quarter was the restructuring support agreement for the debt of the electrical power utility PREPA, which I discussed in our last call. This can now be the basis for an acceptable plan of adjustment that will allow PREPA to focus on the reforms necessary to develop a 21st century electrical system, one that the people of Puerto Rico can trust. This is an important opportunity for Puerto Rico, and we look forward to the RSA receiving the necessary approvals to go forward.

At the same time, we saw that the economic recovery has been coming faster and stronger than the Oversight Board forecasted. Even after multiple norm optimistic revisions, the projections that the Oversight Board used as a basis for its fiscal plans continues to understate the true strength of the Commonwealth revenues. That should be seen as a good news for everyone. Anyone who follows the news is aware of the uproar created by the public exposure of the blatant cronyism, cynicism and corruption in Puerto Rico's political arena. In the midst of this political disarray, upon the governor's resignation, the Title III Court has had the good judgment to send a number of bond disputes back into mediation, which has halted the Oversight Board's attempt to steamroll acceptance of an unfair geo restructuring agreement, negotiated between the Board and a small number of geo creditors that purchased their bonds at deep discounts. This could be a watershed moment when Puerto Rico's decision makers, including the Oversight Board as well as Congress, see that the problem in Puerto Rico is not a lack of funds to pay constitutionally protected creditors, but a lack of recognition that recovery and stability are best and most quickly achieved by respecting and following the rule of law. It is time for thoughtful negotiations that put an end to the ongoing, time-consuming and expensive legal battles and return to the rule of law.

Lastly, I want to highlight how we have executed on our 4 principle strategies so far this year. In new business production, we have performed well in one of the worst interest rates environments we have had to deal with. And we demonstrated the wisdom of our strategy to operate in multiple domestic and international markets. In capital management, we continue to increase shareholder value by repurchasing $248 million of common shares through August 7. In our acquisition and alternative investment strategy, we came to agreement on our most important alternative investment to date, one that should increase the value for our company and diversify our revenue sources. And we furthered our loss mitigation strategy by continuing to recover structured finance losses and by reaching important restructuring agreements in Puerto Rico while defending principles important to well-functioning financial markets.

I will now turn the call over to Rob.

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Robert Adam Bailenson, Assured Guaranty Ltd. - CFO & CAO [4]

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Thank you, Dominic, and good morning to everyone on the call. First, I would like to say that we are very excited to acquire BlueMountain and welcome Andrew and his team to the Assured family. We have a long history of creating shareholder value by executing our strategic initiatives and we expect the BlueMountain acquisition will be accretive to earnings per share and ROE beginning in 2020. In the second quarter of 2019, we posted strong operating results and once again, reached record-high, non-GAAP operating shareholder's equity of $63.48 per share and adjusted book value of $88.67 per share.

Non-GAAP operating income in the second quarter of 2019 was $141 million, or $1.38 per share compared with $74 million or $0.66 per share in the second quarter of 2018. Operating income increased compared with second quarter of 2018, mainly due to the lower loss expense and higher net investment income in the second quarter of 2019 as well as a commutation loss from the Syncora transaction in the second quarter of last year. These increases were partially offset by lower net earned premiums and a higher effective tax rate.

Second quarter 2019 loss expense was a benefit of $1 million compared with an expense of $45 million in the second quarter of 2018. In the second quarter of 2019, we recorded a benefit in U.S. RMBS and an increase in U.S. public finance reserves, mainly on certain Puerto Rico exposures. As a reminder, loss expense reported income in any given period differs from economic loss development due to the consideration of unearned premium reserve in the calculation of loss and LAE under GAAP accounting rules as well as the inclusion of economic development related to financial guaranteed VIEs in economic development.

Economic loss development was a benefit of $37 million in the second quarter of 2019, principally consisting of $118 million benefit on U.S. RMBS and increased losses on U.S. public finance exposures, primarily Puerto Rico. The economic benefit in the first lien RMBS of $19 million was primarily attributable to higher excess spread while the economic benefit in second lien RMBS was $99 million, mainly driven by higher projected recoveries for previously charged-off loans, improved performance and loss mitigation efforts. The effective changes in discount rates on economic development was a benefit of $1 million in the second quarter of 2019.

Net earned premiums were $112 million in the second quarter of 2019, compared with the $136 million in the second quarter of 2018. As expected, after the passage of the 2017 Tax Act, and consistent with the reduction in our insured portfolio that is subject to call, accelerations due to refundings and terminations have decreased to $20 million in the second quarter of 2019 compared with $39 million in the second quarter of 2018.

Net investment income was $110 million in the second quarter of 2019 compared with $98 million in the second quarter of 2018.

In second quarter of 2019, an insured XXX obligation in our loss mitigation investment portfolio was settled resulting in the acceleration of accretable net investment income.

The effective tax rate on operating income in second quarter 2019 was 21% versus 7% in the second quarter of 2018. The effective tax rate fluctuates from period to period based on the proportion of incomes in different tax jurisdictions. In terms of strategic initiatives, we have continued to repurchase shares in order to efficiently manage our capital. During the second quarter of 2019, we repurchased 2.5 million shares for $111 million at an average price of $43.89 per share, bringing our cumulative repurchases, since the beginning of 2013 and through the end of the second quarter, to 99 million shares. This represents more than half of the shares that were outstanding at the start of the program. Accumulative effect of these repurchases was the benefit of approximately $16.86 per share in operating shareholder's equity and approximately $29.33 in adjusted book value per share.

Since the end of the quarter, we have repurchased an additional 1.3 million shares at an average price of $43.59 for a total of approximately $58 million, bringing the current year-to-date share repurchases to approximately $248 million or 5.7 million shares.

This week the Board authorized an additional $300 million of share repurchases, which brings our share repurchase authorization up to $450 million.

We expect to achieve our goal of $500 million in the share repurchases this year. We currently have approximately $235 million in cash and investments at the holding company.

Looking to the future, the BlueMountain acquisition will diversify our earnings stream into fee-based revenues. In addition, we will transfer $500 million of insurance company funds into BlueMountain funds, which we expect will enhance our investment returns. I'll now turn the call over to Andrew.

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Andrew Todd Feldstein, BlueMountain Capital Management LLC - Co-Founder, CEO, CIO & Partner [5]

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Thanks, Rob. Dominic, thank you for the opportunity to introduce BlueMountain to Assured Guaranty's stakeholders. Thank you for the confidence you've shown in BlueMountain, in our people, in our investment processes and in our long-term prospects. Our companies reinforce and complement each other's strengths. It's exciting to think about the value that we can create together. BlueMountain has been managing clients' assets for 16 years. We have assembled a superb experienced team of investment and business professionals. Currently, we manage over $19 billion of assets, and we operate in 3 general investment categories. We are especially prominent in CLOs with $12 billion of CLO assets. We are the 16h largest CLO manager globally. We expect that to grow to $14 billion by mid next year. We manage a number of opportunities funds. These long-duration funds invest in corporate credit, asset-backed finance, infrastructure and health care. And we manage 4 relative value hedge funds. Many companies were interested in acquiring or partnering with us. Assured Guaranty stood out as the one with the strategic vision that most aligned with our own. We were attracted by its strong commitment to building a successful alternative asset management platform by its experience, judgment and long track record in credit and most importantly, because the firms are a great cultural fit. Our relationship goes as far back as 2005 when Assured Guaranty wrapped our very first CLO. Asset management represents a valuable source of fee-based income for the company. It'll diversify revenue sources and complement the risk premiums received from financial guarantee policies. I'm also excited by the opportunity to enhance returns on Assured Guaranty's investment portfolios, always within an appropriate level of portfolio risk. We are acutely aware of the importance of protecting the financial strength of the company's insurance subsidiaries. I commit to give all my efforts and energies to add value for Assured Guaranty's shareholders. And I'm excited and proud to be aligned with shareholders through my own significant stake in the stock. Now I'll turn the call over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question will come from Bose George with KBW.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

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Congratulations on the BlueMountain transaction. Just wanted to ask, I mean you noted it'll be accretive in 2020, but can you just talk about how we should think about the accretion from that over time? What's -- was there some sort of hurdle rate on the capital? Or just kind of the best way to think about it?

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Dominic John Frederico, Assured Guaranty Ltd. - Deputy Chairman, President & CEO [3]

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So as we look at the opportunity, obviously we have a range of outcomes for next year, contingent on: a, how fast we can implement the growth and further investment strategy in the organization; and two, what we can achieve relative to the integration. We have a BlueMountain proposal, we have an Assured Guaranty proposal, and on both cases ours being the more conservative, it's accretive. And as we expect, we do anticipate growth going forward and a continued expansion of our management fee revenue and therefore, the accretion should only grow. Obviously, we look at this investment in light of other investments and opportunities that we had and believed that this was the best course of action relative to what we could do for the Assured company net bottom line and shareholders.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [4]

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And just in terms of the growth, is that -- could there be other acquisitions to bolt on to this? Or is it more organic when you think about them?

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Dominic John Frederico, Assured Guaranty Ltd. - Deputy Chairman, President & CEO [5]

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Bose, as you know our history has been very acquisitive, and we think there's going to be tremendous opportunity in both aspects of both organic growth as we launch new funds and provide additional support by our own invested balances, and two, where we think there will be further opportunity to consolidate the industry.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [6]

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Okay. Great. And then actually one just on the portfolio. Given the tighter spreads in the market, can you just give us an update on when you think it -- timing on portfolio stabilization, is there any change there?

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Dominic John Frederico, Assured Guaranty Ltd. - Deputy Chairman, President & CEO [7]

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Portfolio stabilization news?

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [8]

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Just in terms of your guaranteed profile, in terms of when that runoff kind of stabilizes?

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Dominic John Frederico, Assured Guaranty Ltd. - Deputy Chairman, President & CEO [9]

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Okay. The total volume of new business written. As we said, we actually are optimistic that we kind of bottom out at the end of this year and therefore, next year we expect to see par-over-par growth and obviously, further increases in our PVP production recorded. So we're quite expecting because of the severity of the runoff primarily due to accelerated refundings that now most of that is working through the company. And remember, our acquisitions created a size of portfolio that was not representative of new business opportunities for a single company versus buying 4.5 other companies. So that also had to kind of work its way through the system. So we're reasonably optimistic that 2020 will be year of growth.

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Operator [10]

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And the next question comes from Geoffrey Dunn with Dowling & Partners.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [11]

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Rob, can you get a little bit more detailed in terms of the financing of the deal? You said it's going to be funded by loans out of the 3 subsidiaries. But how exactly is that going to work and ultimately be repaid?

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Robert Adam Bailenson, Assured Guaranty Ltd. - CFO & CAO [12]

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The loans, as Dominic said, are going to be funded out of the AGC, AGM and MAC. There will be an appropriate interest rate associated with that. And then the fee income generated from BlueMountain will generate fee income up to the holding company, repay the debt, and there'll be excess funds available after we pay -- as we are paying that for note, we expect excess funds available at the holding company. And our expectation is that note would be paid off within 10 years.

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Dominic John Frederico, Assured Guaranty Ltd. - Deputy Chairman, President & CEO [13]

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The holding company he refers to is AGUS holdings. So AGUS holdings will make the purchase. It'll borrow the funds from the 3 operating companies, basically utilizing their trapped capital. So there's no real impact on dividend or dividend capacity. Use that balance to buy the company, hold it in US holdings. So the US holdings, which is going to be an unregulated entity, will then receive the future cash flows.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [14]

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Okay. So the -- really the holding company liquidity accretion is going to be the fee income net of the interest payment on the loan, interest and principle.

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Robert Adam Bailenson, Assured Guaranty Ltd. - CFO & CAO [15]

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That's correct.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [16]

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Okay. And with respect to the capital of the operating subsidiaries, there is no impact on the excess surplus from the loan or anything like that, it's going to affect dividend capacity?

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Robert Adam Bailenson, Assured Guaranty Ltd. - CFO & CAO [17]

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These loans -- no, we expect these loans to be admitted assets. And we've structured it such that they will be.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [18]

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Okay. And then I know Dominic mentioned the secondary par, but Rob, what was the secondary par in PVP in the quarter?

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Robert Adam Bailenson, Assured Guaranty Ltd. - CFO & CAO [19]

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Yes, I got that for you. In the quarter the secondary par was -- wait, hold on, the secondary PVP was $25 million and the secondary par was $327 million.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [20]

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Okay. And then lastly, just on BlueMountain, can you elaborate a little bit more about how you can use their expertise in your insurance rep business and how your expertise can be extended into theirs? I want to understand a bit more about the expertise synergies of bringing the 2 operations together.

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Dominic John Frederico, Assured Guaranty Ltd. - Deputy Chairman, President & CEO [21]

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I think the synergies are more than just that. So number one, the first thing is we believe we have a common credit culture. They have a proven track record of performance and so do we. And it touches some very common areas like health care, like CLOs, like structured finance. So there's a lot of duplication of that effort, and I think there'll be a lot of information shared back and forth. Number 2, they're going to see opportunities in their shop that fit more to an insurance scenario and we'll see opportunities in our shop that fit more into an investment scenario. So I think there's feedback there. And number 3, and the most important thing as we went down this path of diversification asset management, we believe we touched the same markets of the same customer base. Therefore, what was a Assured Guaranty relationship can become a BlueMountain relationship, what was a BlueMountain relationship can also become an Assured Guaranty relationship. We are predominantly domestic, say 75%, guessed of the top of my head, they're predominantly international 75%. So there's synergies as well in terms of marketplace. So credit culture, commonality of the type of business we look at. Then from an investment as from a credit, both have the same basis. When you look at investment or credit, it's credit at the end of the day. And then as I said, then we also have the commonality of operations as well in terms of what we can achieve relative to synergies.

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Operator [22]

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And the next question comes from Giuliano Bologna from BTIG.

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Giuliano Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [23]

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Congratulations on the BlueMountain transaction. (inaudible) a follow-up question. Do you intend...

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Robert Adam Bailenson, Assured Guaranty Ltd. - CFO & CAO [24]

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Giuliano, I would -- we're having trouble hearing you.

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Dominic John Frederico, Assured Guaranty Ltd. - Deputy Chairman, President & CEO [25]

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You need to get closer to the mic or pick up your handset.

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Giuliano Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [26]

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Yes. Do you intend to fund both the acquisition price and the working capital from loans? Or you -- do you intend to separate that over time?

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Robert Adam Bailenson, Assured Guaranty Ltd. - CFO & CAO [27]

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The loans would be funded. The loans that are -- there'll be loans that come out of the insurance company, but the investments will be admitted -- will be assets from the insurance company.

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Giuliano Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [28]

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That makes sense. And from a cost perspective, will that be around the same cost as the investment portfolio yield or potentially higher?

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Robert Adam Bailenson, Assured Guaranty Ltd. - CFO & CAO [29]

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Cost. What do you mean by cost?

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Giuliano Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [30]

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The interest costs on the loans that you'd be taking out from the operating...

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Robert Adam Bailenson, Assured Guaranty Ltd. - CFO & CAO [31]

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The interest costs on the loan will be a market rate interest cost based upon what an expected tenure would be.

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Giuliano Bologna, BTIG, LLC, Research Division - Director & Financials Analyst [32]

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That makes sense. And just touching on one item from the quarter, it looks like your investment income jumped up in the quarter. Is there anything that ran through that, that was onetime?

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Robert Adam Bailenson, Assured Guaranty Ltd. - CFO & CAO [33]

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Yes. There was, I said in my commentary, there was a onetime item with respect to our XXX balancing transaction, which was commuted and settled, and we owned it in our loss mitigation portfolio. And once that was settled, cash flow was released and the accretion of income was accelerated. And that was about $14 million.

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Operator [34]

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And the next question comes from Christian Littlejohn with Marble Ridge Capital.

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Christian Littlejohn;Marble Ridge Capital, [35]

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Just curious, how do you think about your appetite to participate in the most recent deal proposed in Puerto Rico to deal with GO and PBA debt?

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Dominic John Frederico, Assured Guaranty Ltd. - Deputy Chairman, President & CEO [36]

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The deal that was proposed by the control board?

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Christian Littlejohn;Marble Ridge Capital, [37]

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Yes, correct.

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Dominic John Frederico, Assured Guaranty Ltd. - Deputy Chairman, President & CEO [38]

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Yes, we have no appetite. It doesn't respect rule of law, it doesn't respect constitutional priorities, doesn't respect our contractual obligations on behalf of the Commonwealth. We have no interest whatsoever.

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Christian Littlejohn;Marble Ridge Capital, [39]

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Got it. Is it a if-and-when there are any negotiations ongoing? Or that's a complete nonstarter for you guys at this point?

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Dominic John Frederico, Assured Guaranty Ltd. - Deputy Chairman, President & CEO [40]

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Well, as you know, the judge has now ruled that we have to do a new 4 month mandatory mediation. I believe that Judge obviously looked at the landscape and realized how far apart the given entities are and felt that if you try to move through with a plan the amount of litigation that would ensue would basically tie it up. So therefore, there'd be no value to it. I think the judge did a very smart call here by saying it's time to get these legal principles closer, and for us closer means paying attention and actually adhering to the rule of law. So obviously, we'll look forward to the mediation. We're more than happy to work collectively to get to a common resolution and we believe it's fair and respects our rights and moves the Commonwealth forward to allow to start to take care of the necessary business it faces.

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Christian Littlejohn;Marble Ridge Capital, [41]

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Got it. That make sense. And then just one more for me, Syncora, one of the obvious kind of current opportunities in the market. Does this BlueMountain deal take your ability to potentially participate in that process off the table?

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Dominic John Frederico, Assured Guaranty Ltd. - Deputy Chairman, President & CEO [42]

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No. And obviously, we look at the 2 shops kind of separately even though they come from a common pool. When we look at the opportunities to buy legacy monolines, obviously that's typically a net positive capital structure. We typically get the capital at a discount. Obviously, in BlueMountain's case, we actually put capital to work, which we need to do because we're very unlevered relative to the capital we have in the organization and the business opportunities we see strictly in the financial guarantees space. We gave you the excess capital number from S&P, in spite of all of our efforts to manage it down it continues to increase. So we've got to work harder to put that capital to work.

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Operator [43]

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And this ends the Q&A session. So I would like to return the floor to Robert Tucker for any closing comments.

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Robert S. Tucker, Assured Guaranty Ltd. - Senior MD of IR & Corporate Communications [44]

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Thank you, operator. I'd like to thank everyone for joining us on today's call. If you have additional questions, please feel free to give us a call. Thank you very much.

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Operator [45]

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Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.